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A unified licence regime is welcome

Come October 2018 and investors will be able to trade in stocks and commodities on the same Exchange. The long-awaited move will bring in economies of capital to all the stakeholders including investors and intermediaries says Kamlesh Shah, Chairman – ANMI, Western Region

Digitisation is the buzzword today, especially so in the way financial products and services are sold | provided and consumed. The emergence of integrated marketplaces for financial products and services has led consumers into a new experience zone. Regulators and policy makers have recognised the need for ensuring ease of doing business, particularly in financial markets and one important development is the allowance to integrate the permission to trade across asset classes including equities, commodities and mutual funds into one single license.

Earlier, the Securities Contract (Regulation) Rules, 1957 and SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 spelt out the need to have different approvals for each of the asset classes. Providing of broking services for stocks and commodities hence required intermediaries to have two different legal entities in place for the purpose. The allowability of a single license to provide broking services in both equities and commodities is now expected lead to a better unified marketplace improving the ease of doing business and helping all stakeholders of the capital market ecosystem.

In the 2017-18 Budget, Finance Minister, Shri Arun Jaitley, had announced that the derivatives market for commodities and securities will be further strengthened by integrating the participants, brokers, and operational frameworks. Further to this, SEBI, in its April 26, 2017 Board meeting, amended the Stock Brokers Regulations allowing intermediaries to operate on a single license across all asset classes, including equities and commodities. It also recommended to the Government an amendment to the Securities Contract Regulation Rules to facilitate this transition. Accordingly, now any broker or clearing member active in the securities markets will be allowed to buy, sell or deal in commodities as well as equity derivatives without setting up a separate entity for each of them.

In a statement issued after the first board meeting chaired by Shri Ajay Tyagi, SEBI said that it will amend norms pertaining to Stock Broker and Securities Contract Regulations, to enable a smoother integration, which it finally did on the December 28, 2017. The impact of this move will be immense.

It is expected to facilitate better capital efficiencies for intermediaries with two different businesses now combining into one. On the other hand, for investors, this means a greater relief in terms of maintaining one account for all asset classes including centralised margins thereby ensuring higher efficiency in capital allocation. Look at it this way. Currency traders with exposure to commodities will now benefit much better with the spread of volatility.

Apart from bringing down costs for intermediaries, investors would reap the benefits of the commonalities in terms of trading and settlement mechanism, risk management and redressal of grievances.

Industry experts believe, the developments are likely to bring in higher efficiencies in the system both on the operational as well as on the compliance front. A cross-utilisation of collaterals across asset classes is expected to bring in higher economic efficiency to the overall business. A single entity, with better risk management capabilities, would translate into a more stable system at the macro level. It would strengthen the capability of the markets to absorb volatility.

Higher efficiency of capital utilisation obviously would result in better volumes across asset classes thereby improving the depth of the markets. Better efficiencies always contribute to reduced participation costs, particularly for new entrants.

The best way to ensure a smoother transition and better integration would be for the intermediaries to merge their multiple entities into one. However, a professional advice on this front would be better, because tax implications will have to be considered by each entity separately. At least 75% should acquire shares of the merged entity. The client consent process has been eased, thanks to SEBI making it mandatory only for active clients. This should not be difficult to obtain during the process of merger. The charges would be nominal compared to benefits

Overall, ease of doing business in capital markets is likely to go up benefitting all stakeholders. The move to allow unified licence for all asset classes will certainly strengthen the position of intermediaries resulting in higher stability in financial markets.